Yahoo’s Strategy: Stay Out of Microsoft’s Crosshairs?

Yahoo defines itself as “a leading global Internet communications, commerce and media company” and, in doing so, has managed to stay somewhat out of the fray as giants like Google and Microsoft battle each other over everything from search dominance to providing a platform for next-generation web development. In fact, Yahoo’s position as primarily a media company is likely to keep it quietly at the forefront of the next generation of world wide web players, say experts at Wharton.

It’s unclear whether Yahoo’s positioning is by happenstance or deliberate strategy, these experts note, but the company has found what could become a savvy way to compete with a large number of strong players — target multiple areas, such as music, search and e-commerce, without riling a major competitor. (Remember Microsoft’s ruthless attack against Netscape in the late 1990s.) “There is a lot to be said for positioning yourself in a way that you are not encroaching on Microsoft’s turf,” says Kendall Whitehouse, senior director of information technology at Wharton. “Google is on Microsoft’s radar right now like no other company.”

From its inception, Yahoo has considered itself a media player, or — as Yahoo co-founder Jerry Yang has said numerous times in the company’s early years — a media platform. The company has held true to its roots as it has expanded by, for example, hiring journalists such as Kevin Sites, who reports from the ground in Iraq, finance columnists, including Wharton finance professor Jeremy Siegel, and writers covering everything from retirement to fantasy football.

Wharton marketing professor Xavier Dreze suggests that Yahoo’s approach has allowed it to fly under the radar and still compete with multiple players across many Internet markets. As a result, Microsoft competes with Yahoo, but also partners with it. “Microsoft is just more comfortable with Yahoo,” says Dreze, noting that Microsoft and Yahoo teamed up on October 12 to make their instant messaging software compatible.

Are observers underestimating Yahoo? At $42 a share, Yahoo has a market capitalization of $59.7 billion. Google, which was recently trading at $428 a share and is predicted by some analysts to hit $500, is more than twice as valuable with a market capitalization of $126.7 billion. In a November 1 research note, Muriel Siebert & Co. analyst Brian Prenoveau called Yahoo an “underappreciated Internet superstar.”

Meanwhile, Yahoo and Google are on similar financial footing, although Google is growing faster. For the nine months ending September 30, Yahoo reported net income of $1.2 billion on revenue of $3.75 billion, compared to earnings of $467 million on revenue of $2.5 billion for 2004. For the same period, Google reported net income of $1.1 billion on revenue of $4.2 billion, compared to net income of $195 million on revenue of $2.15 billion for 2004.

Even Microsoft may be underestimating Yahoo to some degree. Microsoft chief technology officer Ray Ozzie, in a widely published memo, noted that he viewed Google as the company’s biggest threat to its dominant desktop software position. In contrast, Yahoo, although a close second to Google in search, only garnered a passing mention from Ozzie. “Although Yahoo also has significant communications assets that combine software and services, they are more of a media company and — with the notable exception of their advertising platform — they seem to be utilizing their platform capabilities largely as an internal asset,” wrote Ozzie.

Ozzie’s comments suggest that Yahoo’s positioning as a media company has its perks — it doesn’t appear to be a direct threat to any one company. Yahoo, for example, has hired Hollywood executives, including CEO Terry Semel, but remains a partner to television networks and movie studios which advertise heavily on Yahoo’s online services. The company is most comparable to Google in terms of search, but offers much more content across its network. Yahoo has a music business, but it’s not on par with Apple Computer’s iTunes, and it has e-commerce functions such as auctions, but isn’t taking on eBay directly.

Don Huesman, senior director of information technology at Wharton, says Ozzie’s remarks about Yahoo may prove to be shortsighted. “His dismissal of the potential threat from Yahoo is premature in my opinion,” says Huesman. “Yahoo still gets almost half of its revenues from search and it remains the premier Internet portal for hundreds of millions of people. But is Yahoo happy to remain on the sidelines while Microsoft and Google go after each other? You bet.”

Over time, Yahoo could become as big a thorn in Microsoft’s side as Google, says Wharton legal studies and business ethics professor Kevin Werbach. “Google is more threatening to Microsoft today because of the breadth of its ambition, but ultimately Yahoo represents a similar challenge in moving the center of gravity away from the desktop to the web.”

Building an Audience

Perhaps one reason Yahoo doesn’t get the attention of Google is that it isn’t easy to categorize. It competes with Google in search, but has a bevy of other assets such as Hot Jobs, a help wanted site; Yahoo 360, a blogging and community site; and a shopping network featuring large and small merchants. On Yahoo’s conference call outlining its financial results for the third quarter ending September 30, Semel said the company’s goal is to “provide our users and advertisers with richer and more relevant experiences….Yahoo reaches 73% of all Internet users in the U.S. in any given month, which speaks to the breadth of our product suite. Yahoo reaches more people in more ways than any other company on the web.”

According to Dreze, “Yahoo is fighting to own as much as possible” in order to build a massive audience. “Yahoo is trying to be everything. Sure, Yahoo isn’t in the line of fire, but it’s also not great” in any one area. While offering a broad array of content, commerce and services, Dreze adds, the risk of Yahoo’s strategy is that the company loses focus. “Everyone knows what Google does; it’s a search engine. We know what Google is good at, but Yahoo is less clear. If Yahoo keeps trying to be all things to all people, it could become vulnerable.” For instance, Yahoo trails Google in search. According to ComScore Networks, Google’s share of the search market in October was 39% compared to Yahoo’s 29.2% and MSN’s 14.6%.

Whitehouse notes there’s more to Yahoo than search, but that means the company will have a tough time defining itself. Nevertheless, there are numerous web markets for Google, Microsoft and Yahoo to thrive in. In fact, it’s possible that all three could build perfectly good businesses with minimal direct competition. As Werbach states, “Google and Microsoft are probably Yahoo’s closest competitors in the sense of being similar companies. However, as a major Internet player with interests in several areas, Yahoo competes against almost everyone on some level. The web isn’t a zero-sum competitive environment, so it’s not a simple matter of whether Yahoo or someone else will win.”

The Web 2.0 War

Another battlefront where Yahoo is a relatively quiet player is the development of the next-generation of the world wide web, frequently dubbed “Web 2.0,” a reference to attempts to build a web-based computing platform with easy-to-create services that will replace what desktop software does today.

Whitehouse says future development of the web largely depends on which company’s application program interfaces (APIs) become the standard. APIs are a set of routines, protocols and tools for building software applications. “One reason Microsoft is so concerned about Google is the battle to control the APIs for future web development,” says Whitehouse. “If Google becomes the platform for web 2.0 development, it would go to the core of Microsoft’s historical advantage.”

What’s interesting about the API bake-off is that while Google gets most of the attention, other companies such as Amazon and Salesforce.com have made their APIs available in order to hasten the development of web services. But Yahoo is also an emerging player, says Whitehouse.

For example, Yahoo has been innovative with its use of Macromedia’s Flash software for its mapping services and has acquired Flickr, a site that allows its users to tag and share photos across groups. “Yahoo is in a position to sew it all together into a comprehensive collection of services,” says Whitehouse. “These moves could eventually put Yahoo in the forefront of online services.”

However, neither Google nor Yahoo can dismiss Microsoft, says Huesman. “The rapid shift in direction to web services is obvious to everyone, even Microsoft. Microsoft’s task is to slow that migration down, if possible, until it can reposition its enormous resources to overwhelm or acquire the technology leaders.”

The Media Company Blueprint

While Yahoo seems to have its tentacles in dozens of markets, what may be emerging is a prototype for what a media company will look like in the future. For example, it might need to develop content, but also be well versed in software, services and commerce.

Wharton management professor Keith Weigelt notes that Yahoo has been positioning itself for the convergence of television and the Internet by building a search engine for video, forging partnerships with producers such as Mark Burnett, who created “The Apprentice” and “Survivor,” and building facilities in Santa Monica, Calif., just outside Hollywood. “Yahoo has a good plan,” he says.

Werbach adds that it’s unclear what the media company of the future will resemble, but chances are the leaders will look more like Yahoo, Google and Microsoft than ABC, CBS and NBC. “As convergence progresses, the definition of a media company will become less clear,” he predicts. “Yahoo, Google and Microsoft are all companies that aggregate lots of users, content, tools and applications.”

The primary reason Yahoo may be a leader is the Internet’s role in dismantling traditional media distribution. “The continued migration of Internet users from dial-up to broadband bodes extremely well for Yahoo’s content oriented sites,” said Clayton Moran, an analyst at the Stanford Group, in a November 16 report. “As opposed to Google, which is still essentially a search site and is known as such, Yahoo provides information and entertainment content, including interactive content. Yahoo is positioned to benefit from the proliferation of high speed Internet services like interactive gaming, streaming video, video and music downloads, and real-time media events.”

This means that traditional media companies will see Yahoo as both a partner and competitor as it increasingly creates its own content and integrates media with information created by its users. Already the lines are blurring. On Yahoo’s earnings conference call, Semel noted that the company is “still at the beginning of significant long-term opportunities” and highlighted the media group, which is “expanding its content initiatives and its integration with community features.” For instance, Semel noted that Yahoo has integrated professional news sources with “citizen journalism through the integration of blogs, Flickr photos and My Web Links.” One of Yahoo’s most interesting innovations has been to integrate RSS feeds (used for distributing content from blogs) with email alerts. This means, for example, that a California resident who subscribes to a feed from the U.S. Geological Survey could be notified about an earthquake warning as soon as it is issued with an alert message zapped to a cell phone or PDA. Yahoo executives discussed this feature at length in a podcast hosted at podtech.net.

It’s too early to tell how Yahoo’s focus on the media business — and the development of the next generation of the web — will ultimately pan out, but at this point, bets are that the company will be a leading player. As Whitehouse notes, “By focusing on being a media company and a content delivery platform, Yahoo may be able to stay out of Microsoft’s crosshairs longer than some of its competitors. And history has shown that the consequences of tackling Microsoft head-on can be dire.”

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